Earnings Call: Q1 2018

Apr 26, 2018

Good day, and welcome to today's SKS Q11 2018 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Patrick Stanford, Head of Investor Relations. Please go ahead. Thank you, and good morning, and welcome to this conference call, on the 1st quarter results. The conference call will, as usual, take about an hour. Present today are President and CEO, Albert Donjelsen, our CFO, Christian Johansen, our director of the group controlling and accounting, Karina Knack Olsen, and Theo Scheinberg, press and media director and myself, Patrick Sandberg. We'll start as usual by presenting the results would probably last about 30 minutes. And then after that, we are open to take your questions. So and one quick reminder there about the questions. Is good if we can limit it to 1 or 2 questions so that everyone gets the opportunity to post their questions at the end of the call. With that introduction, I'll leave the word to Albrich. Please. Thank you very much, Patrick, and welcome And if we go to the next slide, it is a record start for SKF. It's a record quarter, historical quarter. With record high sales of almost SEK 2,000,000,000, SEK 20,600,000,000 with organic growth of 7.5% and an operating margin of just short of 13% and the cash flow that Of course, could have been stronger, but was definitely much better than last year. If we go to the next slide, we have, as you know, targets. We have 5 key targets, and we are now delivering on 3 of them, and we are doing very good progress on return on capital employed. And the only one that we still have some work to do is networking on, which is in a way absolutely normal in times of high volume growth, there will be a increase of net working capital, but I am sure that you will see good progress also on that going forward. If you take the next slide, we look a little bit more on sales growth in the different regions. And as you see, we're growing in all regions, and I am really happy to see how Europe is coming along Asia Pacific, Middle Eastern Africa, all important segments are growing. And in Europe, it's really good to see that the industrial distribution is developing so well. In the North America and Latin America growth is also there. The underlying growth is there. The little bit weaker figures in Latin America is in my mind entirely dependent on wind. Our large size bearing factory dedicated to wind applications has basically been standing still due to the fact that there has been no deployment of with mims in Latin America basically during the quarter. We see, however, how that we are now starting up the factory again. The same in North America, heavy trucks is going well. We are selling strong into industrial locations. And here, it's basically the wind as well. There are some businesses in wind that we have decided not to pursue. And that's the reason for a little bit lower absolute comparison figures than the underlying figures. And we've talked a little bit about pricing. We've talked about how we are increasing price and you see now clearly that what we have been telling is coming through. And the industrial distribution, VSM price increases are there, and we're working on further enhancing that. I mean, the industrial OEMs, there, wherever there's been a contract change, price increases have been in implemented any automotive, of course, with a slower pace due to the dynamics of that industry, but it's still also prices are coming through and being adjusted also there. If we take the next time, the slide and talk a little bit about things that I see. I'm really happy about. The roping equipment performance is one of our keys to achieving initiatives. Our product and services application know how and customer, customer focus on new technologies starting to really give good results. And we have the suite of both products and services and knowledge to enhance our customer's performance. And I see now how this is truly starting to have effect. And if you take the next slide, we all know that unplanned production stops cost the industry billions. And every time a machine is stopped and open because there's no need drives cost. And we are now absolutely in the position to support the industry like never before, in giving them these benefits from the technology available. And there is a very good development in this going forward. If you look at the next slide, we have we'll talk a little bit about product. We have been chosen as the developed the main development partner for Volkswagen on the all electric MEB vehicle platform, which is their future platform for their new electric vehicles. That's fantastic. If you take the next slide, we talk about another good initiative. You know, the LEAP engine This is the new GE engine for aircraft that's being ramped up. And our hard work to get the main lion's share of that program is now paying off. And we are growing, strong in this business. With those words, you know, has a short introduction to this a very good initial quarter. I hand over to, Christian for more details around the results. Thank you, Alex, and good morning to all of you. So some of this is starting with, on the next page, Thank you. Sales development. Net sales increased with 4.9% in the first quarter, and we still, as you've heard, experienced the healthy growth in the quarter in most of our markets and across most customer industries within industrial and automotive with a few exceptions like wind. Organic sales increased 7.5%. Currency effect was negative 1.9% and the structure component as we've had previously as well was this quarter 0.7 percent related to our divestment transaction that we closed second quarter last year. If you turn page, organic sales growth, last year, our we, as you know, we grew organically 8.2% on full year, which was equally distributed over the quarters. So the 7.5 percent organic sales growth this quarter mean that we remain at around 8% year over year growth, which is very pleasing. Knowing that we now grow from significantly higher comparison values. The working day effect was negative in the first quarter with about 1 day versus last year. So turning page So operating profit, and as you might have seen in the press release, and I would like to mention it as well since it's a change We will from this first quarter onwards only report operating profit including items affecting comparability. So I will come back to reporting changes in the end of the presentation. But if you look at the graph, the reported operating profit in the quarter was SEK 2,625,225,000,000 or some SEK 3 30,000,000 higher than in the first quarter last year. And it was, as you heard from Alrik, the highest operating profit FCF has reported in a single quarter in history. The 12 months trend on operating profit was SEK 8,900,000,000. So if you turn to page, and we come to the profit bridge and taking you through this for the quarter from left to right. We had a negative effect from the divestment, that contributed with 32,000,000 in profit last year that we don't have this year. Karen's impact was negative SEK 287,000,000 compared to last year. If we go to the operating performance, this was for this quarter, very strong. And increased year over year by EUR 649,000,000 with a good leverage. So contributions from organic sales and manufacturing volumes increased by SEK 939,000,000 We saw positive effects from sales volume, from pricemix and from fixed cost contribution from the increased production volumes. Price mix, clearly positive compared to last year. The improvement trend on pricing that we have seen in the previous quarters have continued and gave a clear positive contribution in the profit bridge. Mix was also positive in the quarter both related to industrial automotive mix and to the distribution OEM mix. The manufacturing contribution included a positive profit effect of about EUR 30,000,000 from increased finished goods inventories. The inventories increased slightly more than in the first quarter last year. Cost development in the quarter gave a negative effect of SEK 290,000,000 A report change here as a consequence of what I told you earlier, the year over year effect now includes restructuring costs, which previous year was then reported as items affecting comparability and this is now part of operational performance. And part of the cost development. And it was relatively unchanged in this quarter versus last year. We are also from this quarter, including the year over year effect from Unite in the cost development. So no separate bar for Unite in the profit bridge. And Unite was in the first quarter positive at EUR 65,000,000 compared to the guidance we gave with a positive effect of EUR 50. And the full year forecast for Unite is still positive SEK 100,000,000. So it's a minor item going forward. And that's why we we feel we take it as part of the overall customer. The material cost was in the first quarter negative with 100,000,000 last year, and we continue to manage the to compensate the raw material with positive effects from commercial activities, design and specification changes. And reduced consumption. For the second quarter, we expect the material cost impact to be somewhat less negative, so about EUR 70,000,000 negative year over year. The remaining cost development is then negative 255 consisting ordinary cost inflation, which is around SEK 200,000,000 in the quarter, somewhat higher than previously. We also had some extra costs related to freight through manufacturing due to that we run production now on high capacity utilization and to R and D. And these make up the difference of 55. And for the second quarter, with our positive demand guideline in mind, we expect somewhat higher cost level to remain at negative 2.50, excluding the material that I commented earlier. So in total, 3.20 So that was a lot of comments to the profit bridge. So if we turn page, performance by customer group Industrial, organicnetsales, decreased by 8.5%, significantly higher in both urban Asia and relatively unchanged in North America. Operating margin 15% compared to 14% last year. Contribution from increased sales and manufacturing volumes was positive together with a clear positive effect from pricemix. Automotive organic sales grew 5.5% in the quarter, good sales growth for both light vehicles as well as trucks, strongest automotive markets continued to be Asian. But demand was also good in North America and Europe. Operating performance continues to strengthen and reported operating margin 7.7% compared to 6.8% last year. If we turn income statement for the quarter. If we turn the page, please. Gross margin was almost flat compared to last year, positive contributions from organic sales and manufacturing contribution, offset by negative currency, higher material costs and the general inflation, manufacturing costs, and freight, as I already commented. Selling and administrative expenses as a percentage of sales decreased to 13.1% from 13.7 general inflation offset by positive by productivity, positive currency effects as well as lower unit costs. Financial net negative SEK 200,000,000 compared to SEK 170,000,000 last year. Exchange rate fluctuations had a negative impact versus a positive impact last year. If we go to taxes in the quarter, we had an effective tax rate of 26.3 percent, so clearly lower than last year's same quarter. And this is due to that we have higher profits. Tax is Sweden to a lower tax rate and to the U. S. Tax reform. As well as we have a deviation to last year, which was impacted by tax cost in the first quarter 2017 that related to prior years. Earnings per share in the quarter increased by more than 20% and was SEK 77% earlier. So next page, cash flow After investment before financing, excluding M and A activities, positive SEK 254,000,000 versus SEK 64,000,000 last year, mainly due to higher operating profit offset by increased working capital, while investments were just slightly higher than last year. And 12 months trend was SEK 4,300,000,000. So next page, please. Net working capital, 31.7 percent of sales at the end of the quarter, 0.8 higher than the same quarter last year. Ratio was negatively impacted by currency. However, also adjusted it was somewhat an increase in the quarter. We see good progress when it comes to trade payables. Receivables ratio improved, somewhat versus last year, 19.1%. However, if you compare it to end of last year, it increased a bit. I would say that's due to the Easter weekend, that was in the end of March, which impacted the day of payment from some of our customers. Inventory ratio increased to 23.4% And we have continued to have good availability. Wanted to keep the service levels up with increased customer demand. And as you've seen in the P and L, we do see positive effects from us being able to meet both the OEM and the aftermarket demand profitability. So if we turn page, net debt per day ratio continued to improve. End of the quarter, we were at 66% and excluding pension, we're down to 29%. Next page, guidance for the 2018 for the 2nd quarter, finance net unchanged about SEK 200,000,000 negative. And then we have the currency impact where we have two references and the March, as you have in the slide, we expect SEK 160,000,000 negative in the 2nd quarter. And if you we take the exchange rate of April 24, it's improved a bit. So it's negative EUR 100,000,000 for the second quarter. We still believe tax rate will be 29% and no change to the investment level additions to branded property SEK 2,400,000,000. As I said, coming back to reporting changes and the first one was already mentioned that we now have, 1 operating profit line, including IAC, So that will not be separate, reported, it will report a part of cost developments or where it belong in the profit bridge. And we will not report an adjusted operating profit. From this quarter, we will not give any sequential demand guidance and only year over year demand guidelines and other presume come back to that for the second quarter. And finally, we have also done slight adjustment to the segment definition in our sales reporting and this in order to align it with the general industry standards and you have the segment changes on the right side of the slide. And I will not go through it, but please call us if you have any questions on this. So with that, I'll leave the word back to you, Alek. Thank you very much. And Just to summarize, continued growth in Q1 record quarter, both as far as sales and operating profit and that we are expecting to see this continued into 2Q2 with higher volumes year over year. So a really good quarter, and I'm proud of SKF today. I must say, it feels good. If you look then on our demand outlook, I will read it to you for the sake of good over and demand compared to the second quarter 2017. The demand for SKF's products and services is expected to be higher for the group including industrial and automotive. Demand is expected to be higher in Europe, significantly higher in Asia, relatively unchanged in North America and Latin America. So with those words, I hand over again to you, Patrick. Thank you. Thank you, Albert. And operator, please now we move to the last slide and we move into Q And A. So, please go ahead, operator, please. Thank followed our to allow everyone the opportunity to and we'll take our first person from the queue. Gail Debris from Deutsche Bank. Please go ahead. Your line is now open. Thank you very much and good morning everybody. I have actually two questions, please. The first one is about the Chinese market trend, I mean, how do you see your market share actually trending in China? You've again delivered pretty strong growth there. And, I was curious to see if you were actually outperforming the market and if yes, in which areas. The second question is about the automotive business. I think the turnaround of this business has now been largely completed with the margins getting closer to the 8% target. But the gross momentum is apparently fading a little bit. So what's next here? I mean, do you still expect a division to be able to contribute positively to the earnings growth momentum in the next few years? Thank you. Well, this is Eric here. If you start with a Chinese question, it's at this point, just 1 quarter hindsight to be truthful of knowing exactly how much market we are gaining, and in what segments I tell you, it's difficult for me to be precise about it. In general terms, our assessment is that SKF is now a gaining position in the markets. And when you look at the key markets we're in, we're doing fine. We have, had a relatively good delivery performance, and I think our customers are happy with us. As far as the automotive, yes, I think we've I'm really proud of the team. They have done an excellent job to actually get to what we what were our expectations. Now we we are looking, of course, at many, many new interesting initiatives. And the automotive business If you have the right technology and the right offerings, we'll, of course, be able to give good contribution to the SKF group going forward. I see I see no reason why not. We talk about electrification, We talk about a new powertrain solutions, etcetera. This is a positive in my mind for us. Because rest assured, the traditional powertrain will stay for quite a while at the same time as we have the new power trains coming in and look at it, the you look at the cars that are now being launched, they're mostly hybrid. And yes, there are some pure electrical vehicles, but the big volumes for the years to come will still be with a traditional powertrain. So we are, as you have seen, with the Volkswagen nomination, for instance, a key player in the electrification, as well as a key player in weed bearings and chassis bearings, and in the powertrain. And there's no reason why that cannot continue. Okay. Can I just have a follow-up on the Chinese situation? Have you seen your Chinese competitors following on your price rises? If you recall, they were actually the first one to start compensating themselves already 2 years ago when or 1.5 years ago when we clearly saw the turnaround in the second half of twenty sixteen, So, definitely. Thank you. And now we take our next person from the queue, Klas Berglands from Citi. Please go ahead. Your line is now open. Yes. Hi, Oleg, in Christian. It's Klas from Citi. I will start with the favorite topic, which is pricemix. It seems like price mix is the key driver behind the improved profits, manufacturing only impacting the bridge by 1,000,000 depending on the pure volume drop through, I get pricemix to between 1.5% and 1.8%, which is obviously a big improvement quarter on quarter First, if you can confirm if that's the right ballpark figure. And then if we can try and break down the pricemix a bit, am I right that mix and distribution pricing was perhaps 50 basis points each and then 50 to 100 basis points from the OEM on the annual contract starting to kick in? Yes. I mean, Claus, it's Kitan here. And as we have commented, mean, and you're right in that we have a clear, positive, step up here, sequentially here. I mean, we don't want to I don't want to comment your absolute judgment there on what you gave, but I mean, it's clearly going in the right direction when it comes to pricing. And as I said also, when it comes to mix, I mean, the important factors in the mix is on one hand, as you know, from the margin industrial versus automotive, which was positive and you have the distribution versus OEM, which was also positive by us being able to serve the industrial distribution of the market in a very good way. And on the OEM side, is it around 1 third that is annual contracts kicking in from January or I mean, as we used to discuss, we had so many customers. And so, and I mean, this is locally a customer by customer set up. I mean, what date you have for the change, but But as we have said, we are on this ball. We have been on it for a while. And the longer this positive business climate remain, obviously, the more OEM contracts are expiring, and pricing is on the table and eventually adjusted in the contract to come there. So So, for sure, some of this came in first gen and some of it comes in at other points in time. But I mean, the trend is positive, I think the key that we've been talking about this now for so many and I think that we are now proving that what we've been saying all along is true in a way that there is pricing power and that SKF is on the ball. My follow-up was on raw materials. Did you say EUR 70,000,000 negative year over year in the second quarter, Christian? And should that stay at that level for the rest of the year, per quarter, given that the year over year comp in the bridge is similar from here, Or are the increased steel prices in the quarter going to drive a bigger impact year over year into the second half? No, I don't think so since we had, but I mean, to be honest, I haven't looked into the quarter over quarter. We follow obviously the raw material price trends carefully. And then already and that's why we are on minus 70 we had cost increases that creeped on us already in the second quarter last year and that continued. So but I mean, I would say that the steel price as such has been quite, you know, such orders as long as it's been on quite stable level now. I mean, they are So I cannot comment on the second half of the year, but I would not expect it to increase in the second half of the year for sure. Thank you. Panda Banking Capital Markets. Please go ahead. Your line is now open. Yes, thank you. Well, Christian, thanks for the the clarification on the operating profit, the waterfall there. Could you you mentioned that the sort of production helps the profits by 1,000,000, which I appreciate. Could you please explain how that works since the inventory build was quite significant. It was, I think, 1,000,000,000 or so quarter by quarter and last year, was maybe half of that level. So is there sort of less finished goods or could you please help me understand that? I'll try. And I mean, what you consider in the, in the, let's say, the inventory contribution in the bridge is the sequential bit. Because obviously, the increase from last year, that has been happening gradually during the 12 months, let's say. So but if you take the sequential increase and we always have a seasonality in Q1, because we have, for example, an automotive shutdowns over Christmas and so on. And then they are ramping up again. So if you take the the Q1 sequential inventory beat last year, and you take the same this year, we have been slightly more. Not much, slightly more finished goods inventories this year. And that's what I'm saying, it corresponds to SEK 30,000,000 profit contribution in the bridge from inventories. Okay. Then obviously we have, contributions from the overall, the sold volumes in production as well. But the inventory build which we usually ask for is our community. Okay. Okay. I get back to the on that one. Thank you. Thank you. And now we take our next person from the queue Marcus Almerud from Kepler Cheuvreux. Please go ahead. Your line is now open. Hi, Max, Almerud here from Kepler Cheuvreux. My first question is on pricing. So I know it's difficult to quantify, but if you set kind of the beginning when you raised prices last year distributors and you look at your entire customer base, how far in are you? Are you 70% in, so the 70% of your customers have seen have been impacted by price increases, if you could help us a little bit on that. And then I just want to ask about potential bottlenecks in the supply chain. You talked about last quarter that you had most of the bottlenecks behind you. Is that unchanged or have you encountered new bottlenecks in supply chain? Thank you. Yes. I mean, on the pricing you started on distribution and I mean, obviously, we have implemented price increases in distribution, which means that that has impacted the full chain of the distribution network, say. I mean, I cannot quantify the percentage on the OEM that has implemented price changes in the contracts. I mean, it is steep. But I mean, again, we are pushing on this. We are on the ball. I think you clearly recognize that this is happening. It happened on a quite the firm. We said a slow steady, because our ambitions has been higher last year quarter by quarter. Now we have a somewhat bigger step in first quarter. And we expect to continue to have a clear positive bridge effect from pricemix also. In the second quarter. So that's what I can give you on this. You had a second question also Yes, yes. So I mean, what we have and you refer eventually to the extra costs that we have, but imagine, when you run on high utilization, both in our factories and in the supply chain with suppliers, You have to take costs for rush transports because simply you don't get what you need in your plants on time. And you take this extra cost in this type of markets in order to serve the customers. I mean, that's what you do. And that's natural that it comes some extra and there could be bottlenecks on transport also and you have to take another route or you have to fly things and so on. So this happens. And also in the plants as such, you have to take on sometimes an extra shift, night shift, more expensive and so on. So this is nothing strange, at this part of the business side, you know. Thank you. And now we take our next question from the queue. Andre Sossin from Credit Suisse. Please go ahead. Your line is now open. Yes, good morning. Thanks very much for taking my questions. I'll start on the outlook. You guided for higher year on year, which I think in your is the range of 4% to 8% growth. You've just done 7.5% in Q1 against a negative days effect, which is at least, well, a couple of points of growth, maybe 0.5. So just wanted to check that firstly, your outlook is still on an all in basis. So it's not days adjusted. And if it is, then what is behind that sort of implied slower run rate, even at the top of that guidance range of 8%. Compared to what you've just done in Q1. Is there anything, in there that you expect to grow at a slow pace? Or is it just conservatism? Oh, again, I mean, we don't we don't I mean, it's a demand guideline we have, it's a demand guideline in organic sales include pricemix. So back to that demand guideline, we take it as it is on the calendar. We don't do any kind of seasonal adjustment and day adjustments and so on. And what you said, at least when we calculate 1 day in a quarter is below a percentage. Oh, sorry. One day in the quarter, it's slightly more than a percentage. So I don't know what you said there, but you're right. You're right. Okay. So it's clear that the pricemix could be a good making difference. Thank you. And just because you report now all in, can I double check if there's anything in Q1 of a one off nature? Whether operational or not, whether positive or negative? No. If you talk, if you talk, restructuring costs year over year, it's not in quarter 1. Okay. And no revaluations of inventory or anything like that? No, I mean, not that if you talk about whether our guidance and source is an underlying stable performance, I'd say yes to that. We don't have any special things in the quarter that makes it the performance that you see now unique or. Okay, great. It was just to double check and the move to all in reporting is a move towards high quality, sir. Thank you. Thank you. And now we take our next question James Small from Redburn. Please go ahead. Your line is now open. Morning, everyone. I have a couple of questions. I'll go one at a time, if I could. Just on the pricemix, You've always been quite clear in the last 40 years about that number. And even in the last couple of years, it's been relatively clear. You seem to have abandon any transparency on it this quarter. Maybe I could try a little harder. Is it closer to 2 or 1 for the quarter? My first question. As we said, we don't comment on the number. Okay. And just secondly, to follow-up on Andre's question, Are you saying that adjusted EBIT had the reported is identical to reported EBIT? So the nonrecurring item is 0. The quarter? No, sorry. Then I mean, in the bridge effect is 0, but you have in absolute terms, you have in the same range as you had last year, which were around SEK 60,000,000. Sorry, if I misunderstood the question. So we have I mean, on this we have discussed this, we don't have big programs, but certainly we save up some costs. We are working on our footprint projects, which have some some restructuring costs. So you have that on a same level as roughly same level as you had last Okay, thanks. And earlier finally on cost development, I think you mentioned 1,000,000 excluding the raw material, for the 2nd quarter. Am I correct in saying that includes your Unite positive? Yes, I mean, for second quarter, if you have a full year, United States, which still remains, as we guided last quarter, plus 100. And we had a positive 65 in the first, You don't have March of Unite in the second quarter, but yes, it includes the 250 includes Unite. Thanks. Maybe finally, I could just another second final question. On China, Could you help us with the pace of growth of China versus the rest of Asia Pac? Is there a big difference between the 2? China is doing is, of course, China is the still the major economy in that regions, you can imagine, with that kind of growth figures China is doing very well. Thank you. And we'll take our next person from the queue. Good morning and thank you for taking my question. I would it's I guess it's a question for Christian and it's a big picture question around how we should think about the cadence of your margins in any given year. When I look at the last 2 years, the first quarter margin has actually been the kind of high watermark for the year. And obviously, I think there are inventory and other effects in there. But when I go back further, I look all the way back to 2011, you've actually seen quite big step ups between your first quarter and your second quarter margin and into the remainder of the year. I fully realized that there are some inventory effects, all kinds of different things going on here. But in your mind, as the CFO, is there any is there any normal seasonality or is there any normal pattern that we should think here in terms of margin? So your question is if seasonality has changed from from previously in history. And if we have a certain seasonal pattern on margins, no, I mean, Spontaneously, I mean, obviously volumes are somewhat different in the quarters. They are not 25% even though you don't have a dramatic difference between the quarter, but that certainly to some extent impacts the margins. But there is nothing else in our business in terms of that you have segments that are buying more or less on the big picture that influence the margins in the quarter. So at least as far as I mean, obviously, it could have, I mean, the industrial automotive mix could be different. But I mean, I have to come back and look to that. There is one, this is Eric here saying, there's one thing that we have been working with, if you know, and this is tried to avoid the pre buys in the end of the years previously many distributors were buying to reach a bonus in the end of the year, etcetera. And we have diligently the last 3 years work to get over to a COGS, meaning they are getting whatever incentives from SKF based on what they sell with the transparency as opposed to what they buy. So we don't get these industrial dynamics that we used to have. You remember, that gives a change. That's very helpful. Thank you. And then just one, a final question. Just on the price increases, and I realized that you're looking at lots of different, moving parts. Geographically, where did you see the strongest reception and where has it been toughest? Well, it's interesting. If this is not a geographical thing, it's interesting to see that some parts of the bearing market is not global, meaning you are more, it's more difficult to sell the bearings because of their size or whatever outside of your region. But basically, the bearing market is global. So there is actually a global trend. And here, in a situation like we are right now. I think there's pricing opportunity everywhere. But of course, there will be certain segments where you as a company, you are stronger and there are other where there's more contested market. There's there are customers where you are more differentiated than in others. And this is like it's always been. And I think that this is what I've been trying to tell, that it's like it's always been. It's not a new dynamic now than it used to be before. You. Now we'll take our next question from the queue, Markus Mayer from UBS. Please go ahead. Yes, hi, good morning, everyone. Two questions from my side, please. 1, let me ask the OEM contract question in a different way, if I may. If you look at the last four quarters, and aggregate over that, is it a 20%, 80%, 50% of contract has been renewed at new price level. So where would you put that number roughly? And then secondly, your inventory is slightly confused. So I think if we go back to The discussion 3 months ago last quarter, the estimate was 1,000,000 finished goods built in the quarter So it sounds like now of the 1.3 that we did overall, maybe sort of like a smaller than the 300 figure wasn't finished goods. What happened in the quarter just in terms of the incremental inventory build there? And what does that tell us for for, I think, momentum demand into Q2, right? Because I understand you're no longer giving sequential guidance, but I'm just trying to understand the relative moves within inventory a bit better here. Thank you. If we start with the pricing question, I just can tell you, there is pricing power in the marketplace. And we are exercising our ability to compensate costs and improve our margins. And you know, the kind of details, how many contracts or whatever it is not relevant for me to even speak about that. The truth is, what you rest assure that there is a positive dynamics in the marketplace, and there is pricing power. And if I try, come back to your inventory request. I mean, if you look in the balance sheet, then knowing what happens to the currency situation as we have talked about. You have a lot of currency in the balance sheet, So it's a lot of currency in the overall. Then if you look at the content of inventories, we used to talk about 2 things: the manufacturing stock or in the channel stock, which includes raw material. It includes, components and so on, and it includes, work in progress and so on in the factories. And then you have finished goods inventories. And you're absolutely right. I mean, when you talk about the EBIT effect, the value add that you'll get. That you'll only get on the finished goods side. We don't have any value by having steel bars in your inventories, So what we guided for in the previous quarter was that we expected the finished goods to increase with SEK 300,000,000. And what I'm saying now is that it has increased slightly more. And it was EUR 300,000,000 last year as well. And so we said that we will build in the guidance, we said we will build the same amount this year as last year. Now we did slightly more and the slightly more, is EUR 30,000,000. In EBITDA. For that? Now we take our next question from the queue, Andreas Kosi from Dougherty. Please go ahead. Thank you very much. Thanks for taking my question. Can you hear me? Yes. Yes, perfect. So I'm a bit surprised to see the gross margin being unchanged year over year when you're able to increase your prices and you get support from your inventory build, I thought we should see higher gross margins coming through from higher prices. So just if you can explain why we are not seeing higher gross margins and also what to expect going forward. Yes. I would say the main thing that changed what you say, I mean, don't want to go into detail so that we had divestments as part of an export, some decimals on that. The big thing that changed the correct thing that your assumptions you have is the current effects. And we have had a if you look in our currency composition, it's a lot of transactional effects and the transactional effects is fully coming into, to the gross profit. And then we have also negative effect the translation effects and growth. So I would say it's largely, currency, but except for that, we are increasing our gross margins. So we the positive effects from pricemix from manufacturing volumes is more than offsetting the cost increases that I have commented. Yes. Okay. So underlying gross margins are actually up. Yes. Yes, excluding currency impacts. Okay. And then secondly, on the cost inflation, the general cost inflation, I think you have previously guided for some SEK 600,000,000 per year. Should we now expect that to be closer to SEK 1,000,000,000 this year and next? Or what how to think about this more than next quarter? No, I mean, I don't expect it to be a 1,000,000,000. And it's obviously, I tried to estimate it since we have used that language, what is underlying cost inflation and what is extra cost to that we run very high on the overall operations. So we should not expect it to be that high, but slightly higher. I mean, we had and we talked about that before, I believe, slightly higher, salary increase, for example, in Central Europe and Germany. That was what we had previous year. So So some of this is it is somewhat an increase. So but I have to come back to that, I mean, on the overall full year basis. I don't have an answer to that question. And then lastly, it sounds like you have built finished goods in constant currencies of around 100,000,000 Swedish krona during the quarter implying that you have increased raw material inventories quite significantly. So I guess that will be turned into finished goods in the next couple of quarters. So what to expect in in Montreal finished goods cost and currencies in Q2, Q3? I mean, I'll keep your first conclusion on Roman, but I mean, your question is, what will happen to our finished goods inventories in Q2? I mean, we had, as you've seen in our demand guidance, we have we do have a high demand also. So things are going out as well. So, we presently don't expect to build a lot of Finnish goods inventory in Q2. We don't expect that. So I would say relatively unchanged. And in Q2 last year, you built to buy $400,000,000? Correct. Thank you. And we'll take our next question, Johan Juberg from Sandbank. Please go ahead. Your line is now open. Johan, please go ahead. Your line is now open. Sorry, excuse me. I had a couple of questions. Starting off with the comments you made, Alex, on the volumes in the quarter, you're trying to hold back on attempts to pre buy here. Could you say that? I didn't say that. What I was trying to explain was when you look at the seasonality going back, We used to have a phenomena in SKF prior to 2015, where to reach the end year sort of bonus schemes, made distributors bought a lot of good by the end of the year. That we have diligently changed in the last years, and that is changing somewhat maybe the seasonality. As far as distributors, we don't think that there is an excess inventory in the distributor network at this point. Okay, great. Thanks so much for clarifying that. Also, I know you don't like to talk about the future what you're going to achieve in the future, but rather what you have achieved in the past here, but could you say something about the price prices for Q2? I hear from other distributors that there's a second price increase to distributors right now pending. Can you confirm that? Yes. Good. Thank you. And that should with typical delay in OEM contracts should have an impact upon OEM contracts during the second half and also possibly the first first half of twenty nineteen, if you value look at history, right? Well, it's always a situation with with all contracts that when they come due, there's a discussion about, what is the reasonable price level. And right now, of course, it is the sellers market and there's an opportunity to improve your price also going forward. Got you. And also talking a little bit about your manufacturing footprint, what you're doing right now. I mean, you have earlier highlighted that also, you highlighted your annual report on closing down facilities. How is that activity level doing right now considering the strong demand? Is that on hold? Are you waiting for kind of slowdown maybe in volumes before you start to re initiate those initiatives? Well, you know, the initiatives are never on hold and they can, of course, never be, publicized before they are actually about to happen. But there is a certain truth in what you're saying. As you're running even if you want to, to, you have a new setup and you want to change a line or consolidate footprint. It's very difficult to do when you're at the same time struggling and working full time to serve the marketplace. So you are right. There is a certain slowdown, of course, in our ability to do this project, currently. And in addition to that, maybe, the ones that you have seen in terms of press releases, a couple of plant closures and plant moves in the U. S. Obviously, they are communicated and they are implemented. Could be some quarter of delay and so on due to the demand situation, but they are not stopped, And that's one of the reasons why we have still some restructuring costs in the quarter here related to these footprint changes. My final question, when you talk about prices, are you mainly referring to bearing or are you referring to your whole products. Oh, everything. Of course, everything. Everything. I mean, the reason is that there has been some doubt about this, with your peers. And we have been trying to tell you this is not correct. And I think now we are proving that our standpoint that there is a pricing power with SKF is true. And I hope everybody puts this question behind them now and start believing us for real. Thank you. Session for today. I would like to hand the call back to Patrick Stenberg for any additional or closing remarks. Thank you so much. Thank you for your questions. If you have any additional questions, you are more than happy to give me a call. And on the last slide in the back here, you will see some of the upcoming events when we will be able to meet you in person also, through video conferences and so forth. And I want to thank you for assisting today's conference and It is a record quarter for us, Kev. We are performing well And I'm looking forward to continue to have a good dialogue next quarter. Thank you very much. Thank you. Ladies and gentlemen, that will conclude today's SKF Q1 2018 Results Conference Call. Thank you for your participation.